Basic Microeconomics - MM1

CATEGORIES OF MARKETS
MARKET FUNDAMENTALS
➢ Markets arrange the interaction of
LESSON 4 buyers and sellers. It can be but does
not have to be a physical location
Markets are important because they allow like a supermarket.
the allocation of resources in the economy.
They serve as an avenue in which ➢ Markets can take on other forms –
consumers and producers can meet and
interact. It is a mechanism that facilitates ○ virtual market - shopee,
trade by which the prices of commodities lazada, carousell
are determined. ○ labor market - marketplace
where employers seek to hire
DEFINITION OF A MARKET workers and individuals look
For the process of exchange to take place, a for employment. Ex.
market is necessary. A market is a place Jobstreet Ph
that enables two parties – buyers and ○ real estate market - is a
sellers, to interact with each other or marketplace where properties
exchange goods and services. such as land, houses, condos
and commercial spaces are
Economists suggest that markets have the bought, sold or rented. Ex.
following Elements/Components: Lamudi Ph
○ foreign exchange market -
1. Buyers. People who demand and marketplace that determines
consume goods and services. the exchange rate for global
2. Sellers. Firms that produce or supply currencies. Ex. Metrobank
goods and services. ○ and so forth.
3. Goods and services. The existence
of commodities for transaction or ➢ A Market can be a specific location,
exchange. such as a retail outlet. It may cover
4. Price. The mechanism that regulates local, national, or global in scale,
the quantities demanded and such as the market for petroleum
supplied. products.
5. Money. Serves as a facility or ➢ It may be a formally established
medium of exchange. process, such as the Philippine
6. Demarcation of area. This includes Stock Exchange, or an
the specific place or location, region, unorganized one, like the
country or the whole world. underground or black market.
 the ease of entry and exit from the
➢ Regardless of the forms, markets market.
always perform a role to facilitate The interaction and differences between
the exchange of goods and services. these characteristics result in the existence
of several structures of the market. These
➢ Markets vary in form, scale, include:
location, types of participants, as
well as the types of goods and 1. Perfect Competition
services traded. The broad 2. Monopolistic Competition
classification of markets in the 3. Oligopoly
following table: 4. Monopoly

The structure of the market is determined by

the nature and degree of competition
prevailing in a particular market. The
degree of competition in the market from
highest to lowest is perfect competition,
monopolistic competition, oligopoly, and
monopoly. The most competitive market
structure is perfect competition, and the
least competitive market structure is
monopoly.

MARKET STRUCTURE PERFECT COMPETITION

Firms trade goods and services under Perfect Competition is a market structure
various market circumstances, which is that features a large number of firms selling
referred to as market structures. homogenous products with no barriers to
entry and exit, and perfect information about
➔ A market structure is an market conditions.
environment that describes the
characteristics of a market Common Examples of perfect competition
influencing the firm’s behavior in include the
terms of pricing and output market for agricultural products
decisions. street foods
foreign exchange
➔ Market structure is characterized
stock exchange
by the number of buyers and firms in
the market, the nature of the product online shopping
traded, the extent of information
available to market participants, and A perfectly competitive market has
these important characteristics:
 MONOPOLISTIC COMPETITION
1. Numerous sellers and buyers. With the
Monopolistic Competition is a market
presence of many buyers and sellers, each
structure that presumes a large number of
may act independently of other agents, and
buyers and firms producing and selling
each contributes insignificantly to influence
differentiated products with very few
the market. Each firm is a price taker and
barriers to entry.
does not influence the price. If a firm tries to
increase its price, consumers will buy from
Examples of monopolistic competition
other competitors at a lower price instead.
include
Thus, consumers may be considered price
fast moving consumer goods
makers.
retail clothing
2. Homogenous products. All firms sell a consumer electronics
homogenous product in a given industry. franchised businesses
Product is homogeneous if one cannot be restaurants, etc.
distinguished from competing products from
different firms. For instance, a buyer of A monopolistically competitive market
tomatoes cannot distinguish between the has these important characteristics:
public market’s tomatoes and the
supermarket’s tomatoes. As a consequence, 1. Many buyers and sellers. This feature
buyers are indifferent to the sellers resembles perfect competition. However,
monopolistically competitive firms can
3. Perfect Information. Both buyers and contribute only a small influence on the
sellers have instantaneous knowledge about whole market. In this market structure, firms
the price, product quality, production are price searchers.
techniques, and so on. Buyers are
knowledgeable about market prices, and 2. Differentiated products. All firms sell a
firms know everything that competitors do slightly differentiated product. Product is
related to selling the product. differentiated if one differs slightly from
other products in the same market. Product
4. No barriers to entry and exit. Since differentiation may be attributed to
there are no transaction costs, both buyers branding, design and packaging,
and sellers do not incur costs when they advertisement, promotion, customer service,
trade goods. Sellers can freely enter or exit etc. Smartphones, laundry detergent, and
the market without cost. There are no cosmetics brands are examples of
barriers that exist, keeping new sellers out of differentiated products.
the market.
3. Easy entry and exit. Similar to perfect
competition, firms can easily enter or exit
from the market as there are very few
barriers, legal or otherwise
 applications like Word, Excel, and
PowerPoint of Microsoft Corporation is an
example of a monopoly.
MONOPOLY
3. Difficult barriers to entry. Under
Monopoly is a market structure that features
monopoly, entering the market or industry is
one firm selling a unique product with
difficult as the barriers to entry are
extremely high barriers to entry.
extremely high. Patents, trademarks, and
government regulations act as barriers to
Examples of a monopoly include companies
entry for new firms who wish to come into
like
the industry.
Facebook and Monsanto
Utility companies (electricity and
water) such as Meralco and OLIGOPOLY
Maynilad, and Oligopoly is a market structure that features
Others which solely supply goods few firms producing or selling either
or services in a particular area. homogeneous or differentiated products
Pharmaceutical company holding having barriers to entry.
a license of a new drug
Some examples of oligopoly include the
Firms that own patents or copyrights like Oil companies (Shell, Caltex,
a pharmaceutical company holding a license Total) and
of a new drug are in monopolistic markets Other firms in the airline industry,
The Automobile industry,
A monopolistic market has these The Beer industry, and many
important characteristics: more.

1. One seller. There is only one firm that An oligopolistic market has these
supplies products in the market. As a important characteristics:
consequence, the firm is the industry. A
monopoly is completely different from 1. Few sellers and many buyers. There is a
perfect competition, where a large number small number of interdependent firms that
of firms make up the industry. Since there is dominate or control the market. The
no competition, the firm enjoys the power of oligopolist is considered a price searcher.
controlling the supply and setting higher
prices of products. Thus, monopolists are 2. Homogeneous or differentiated
price makers, products. Firms either produce
homogeneous or differentiated products.
2. Unique product. The sole supplier sells a Oligopolistic markets supply homogenous
product that has no close substitutes or no products such as petroleum and aluminum
competitors. The Microsoft Office
and sell differentiated products such as
automobiles and aircraft.

3. High barriers to entry. New firms face

high barriers to entry; hence, it is difficult to
enter an oligopoly industry. Oligopoly firms
are big and usually benefit from economies
of scale. Same with monopoly, patent rights,
and other legal barriers keep out new firms
from entering the industry

1 BSBA- MM-1 (basic microeconomics reviewer)